By Scott Gelin and G Roxanne Elings*
A pdf version of this article may be downloaded here.
It has never been easier for sellers of counterfeit goods to avoid getting caught. The Internet is particularly well suited for anonymity, and counterfeiters readily take advantage of the Internet’s cloaking abilities. Counterfeiters are able to register domain names, operate web stores that sell counterfeit goods and/or sell counterfeit goods on third party auction platforms, accept and process credit card payments, and ship these illicit goods directly to customers, all without revealing their true identities to consumers, who often think they are buying the real thing, or to brand owners who might try to stop them.
But if brand owners cannot catch the actual counterfeiters and make them pay, why not pursue the selling platforms, credit card processors, shippers, and Internet service providers who make these counterfeit sales possible? After all, these entities garner fees when counterfeiters use their services to sell and distribute fake goods. Also, these service providers may know the counterfeiters’ true identities and be in the best position to make them stop. Another advantage for brand owners to focus on service providers rather than the counterfeiters themselves is that the former are generally easier to locate and often have deeper pockets.
Service providers, for their part, maintain that the counterfeiting is far removed from the services they provide. They argue that they serve a large number of customers, the vast majority of whom use these services for legitimate purposes, and that they do not have the resources to monitor each customer’s use of these services. Service providers also argue that they have no greater knowledge of counterfeiters’ true identities than brand owners because counterfeiters provide them with phony names as well. Service providers worry about breaching privacy laws and customer obligations if they provide brand owners with customer information. Some service providers have adopted programs to take down infringing sales and revoke counterfeiters’ accounts but wonder why more brand owners are not taking greater advantage of these mechanisms.
Contributory liability in the context of intellectual property infringement is the concept that a service provider can be held responsible for the acts of an infringer for whom it provides services. While the concept of contributory liability for trademark counterfeiting and other intellectual property infringement has been around for decades, it has become an especially vital topic in the age of global ecommerce. This article discusses the current state of contributory liability for trademark counterfeiting against ecommerce service providers and suggests steps, despite the uncertainty in the law, that brand owners can take to persuade third party providers to stop supporting fake sellers, as well as steps service providers can take to avoid liability.
Standard for Contributory Liability in Trademark Counterfeiting
Contributory liability in the context of intellectual property is governed by the Supreme Court decision Inwood Labs., Inc. v. Ives Labs., Inc., [FN1] which involved the sale of generic versions of a prescription drug using the trademark of the original drug. While the pharmacists and not the pharmaceutical companies allegedly used the trademark in question to sell the generic drug, Ives Laboratories, the trademark owner, argued that the generic drug makers were contributorily liable for infringement because they had manufactured the generic drug to resemble the brand-name drug, allowing the pharmacists to pass off the generic drug off as the real thing.[FN2] The Supreme Court held that the generic drug manufacturers could be liable for contributory infringement if they had either (1) intentionally induced the pharmacists to infringe or (2) supplied these goods when they knew or had reason to know the pharmacists would use them to engage in trademark infringement. The Supreme Court upheld the District Court’s findings that Ives Laboratories had not met either standard. [FN3] The Inwood test has since been extended from third-party suppliers of goods to apply to third-party service providers, provided the service providers exercise “direct control and monitoring of the instrumentality” used in the infringement. [FN4] As a result, flea market or swap meet operators, [FN5]landlords, [FN6] check-cashing businesses, [FN7] and shipping services [FN8]have all been found liable for trademark counterfeiting by supplying their services to those whom they knew or had reason to know were using these services to commit trademark counterfeiting.
As counterfeiters continue to move their operations from brick-and-mortar stores to the Internet, the new battleground for contributory liability is the extent to which Inwood can be applied to ecommerce service providers such as selling platforms, credit card payment processors and Internet service providers. Three recent U.S. cases help focus the parameters of third-party liability in the ecommerce realm.
Tiffany (NJ) Inc. v. eBay, Inc.[FN9]
The seminal case to set the parameters for contributory infringement in the ecommerce context is Tiffany (NJ) Inc. v. eBay, Inc. In 2004, the iconic jewelry brand Tiffany sued eBay, the world’s largest on-line selling platform, for contributory liability for trademark counterfeiting, among other claims, based on third-party sales of counterfeit Tiffany jewelry on eBay. Tiffany argued that nearly all Tiffany products sold on eBay were counterfeit, that eBay knew about these counterfeit sales and that it not only refused to stop these sales but actively promoted them since it garnered fees for each sale of these counterfeit products. [FN10] eBay argued that it is merely an on-line platform that allows third party sellers to list and sell their own products, products which eBay never inspects or comes into contact with. eBay also argued that it had no obligation to halt sales of all Tiffany goods since many were genuine, but that if a particular Tiffany product were suspected to be fake, eBay would promptly remove the sale. [FN11]
In July 2008, after a bench trial, Judge Richard Sullivan ruled in eBay’s favor, finding no liability. [FN12] The Court found that, contrary to eBay’s arguments, eBay exercised direct control and monitoring over sales of counterfeit goods on its selling platform in a way that made it analogous to a swap meet or flea market operator and was thus subject to Tiffany’s contributory infringement claim. [FN13] But the Court held that eBay did not know or have reason to know that all or substantially all Tiffany products being sold on eBay were fake. Indeed, the court found that Tiffany had not established, as it had claimed, that substantially all Tiffany products sold on eBay were fake. [FN14] The Court found that the Inwood standard did not impose a duty on eBay to anticipate future counterfeit sales but rather a duty to act promptly when it learned that a particular Tiffany product was fake. [FN15] The Court found that eBay met this standard.
The Court made much about eBay’s proprietary “takedown” program called the Verified Rights Owner program (“VeRO”). Under the VeRO program, when a participating brand owner notifies eBay that it has a good faith belief that a particular eBay sale is for a counterfeit version of its products, eBay will remove that listing within twenty-four hours and unwind the sale if it has already been effectuated. The Court also noted that eBay employed a staff of 4,000 employees dedicated to fraud prevention, including investigating and stopping the sales of fakes goods on eBay. [FN16] The Court observed that Tiffany was not taking advantage of eBay’s VeRO program to remove sales of fake Tiffany products and encouraged Tiffany to do so. [FN17]
Tiffany and eBay each appealed parts of the judgment. On April 1, 2010, the Second Circuit upheld the District Court’s finding that eBay was not contributorily liable for the sale of counterfeit Tiffany goods on its selling platform. [FN18] The Second Circuit affirmed the lower court’s interpretation of Inwood and its progeny to find that eBay had no duty to anticipate future sales of counterfeit goods on its platform but rather to stop specific sales when it became aware of them and that had eBay met this standard. [FN19]Louis Vuitton Malletier, S.A. v. Akanoc Solutions Inc.[FN20]
Despite the strong ruling in eBay’s favor, the Tiffany v. eBay decision did not foreclose the possibility of contributory liability for trademark counterfeiting in the ecommerce context. In another contributory liability case involving ecommerce service providers brought in the United States District Court for the Northern District of California, a federal jury in August 2009 awarded the fashion house Louis Vuitton Malletier $32.4 million in a contributory trademark and copyright infringement action against the Internet service providers Akanoc Solutions, Inc. and Managed Solutions Group, Inc. for failing to shut down a specific group of China-based websites selling counterfeit Louis Vuitton handbags that Defendants had hosted. [FN21] Louis Vuitton argued that Defendants had direct oversight and monitoring of these web sites that sold counterfeit goods and that it had sent numerous letters to Defendants Akanoc Solutions and Managed Solutions Group putting them on notice of the infringement and demanding that the web sites be taken down, but that Defendants failed to comply. The jury specifically found that Defendants knew or should have known that their customers were engaging in counterfeiting and that they were in a position to stop providing these services but did not.[FN22] The jury found that Defendants had acted willfully [FN23] and awarded Louis Vuitton the then-maximum statutory damages of $1 million for each of Louis Vuitton’s thirteen trademarks, along with maximum copyright statutory damages for various copyrights. In effect, Louis Vuitton was able to satisfy the “know or should have known” prong of the Inwood test that Tiffany was unable to show in Tiffany v. eBay.
Gucci America, Inc. v. Frontline Processing Corp.[FN24]
In another recent action by a brand owner against ecommerce service providers, the U.S. subsidiary of the fashion house Gucci sued three banks and credit card processors last year in the United States District Court for the Southern District of New York for contributory infringement based on the sale of counterfeit Gucci bags. Gucci had brought an action in 2008 against a web store called The Bag Addiction for trademark counterfeiting. [FN25] Gucci alleged that, in the course of discovery in that action, it learned that Defendants were providing payment processing services for The Bag Addiction while knowing that the web store was selling counterfeit Gucci handbags, and, in fact, were charging higher processing fees because they recognized that there would be more product returns and credit card chargebacks since The Bag Addiction’s handbags were counterfeits. The case is currently pending.
Practical Tips for Brand Owners
Despite the uncertainties about the current parameters of contributory liability against ecommerce providers, brand owners should take advantage of the procedures many service providers have in place to prevent or remove counterfeit sales. One key reason why eBay prevailed in the Tiffany v. eBay case because the Court found eBay to have acted promptly to remove listings from its site as soon as it became aware that they might be fake. Given the eBay decision and the jury award in Akanoc, service providers have every incentive to act quickly when they are put on notice of an infringement. While other selling platforms and auction sites might not have as advanced programs as eBay’s VeRO program, almost all of them – even the China-based selling platforms – will remove sales identified as fake by brand owners. Many, like eBay’s VeRO program, will go further by providing brand owners with the identities of infringing sellers and often prohibit these sellers from using their services again. Some on-line selling platforms will even agree to designate a brand name or trademark as a “forbidden” term so that sellers cannot use that term to list or describe their goods. In addition to online selling platforms, other ecommerce service providers like Internet service providers, web hosts, search engines that sell sponsored adwords and payment processors will remove listings and stop providing service upon notice of an infringement.
Brand owners should set up a system to send “takedown” notices to various selling platforms on a daily basis. These takedown efforts are a cost-effective way to remove vast numbers of fake goods from the market each month, which may discourage counterfeiters altogether, or at least force them to move on to less enforced brands. Moreover, the information gathered from takedown programs can be used to identify the larger counterfeiters and the most valuable litigation targets. In the event brand owners do not receive compliance from a service provider, the brand owner’s takedown and compliance efforts may help build a case for contributory infringement like Louis Vuitton did in Akanoc.
Practical Tips for Service Providers
Despite the uncertainties in contributory infringement for ecommerce service providers, it is important for service providers to be aware of the factors involved in proving contributory liability and to stay on the right side of them. The Tiffany v. eBay opinion provides the clearest roadmap to date for how a service provider can avoid liability – essentially by adopting all of the enforcement policies that Judge Sullivan commended eBay for adopting. The biggest factor seems to be whether action is taken when a service provider is put on notice of infringement. While both eBay and the Defendants in Akanoc were found to have been in a position to exercise direct control and monitoring over the infringing activities, eBay was found to have acted promptly to remove sales and stop providing services while the Akanoc Defendants were found to have intentionally continued providing services after this notice was given. Service providers should have systems in place to remove users who are selling infringing products or using their services to sell infringing goods. Service providers should make sure their posted “terms of use” and agreements with customers clearly prohibit use of their services for counterfeiting and allow them to revoke users and provide the users’ information to authorities or the brand owner.
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*Scott Gelin is a shareholder in Greenberg Traurig’s trademark/brand management group. He counsels clients in a wide variety of IP issues ranging from anti-counterfeiting and brand protection to copyright and trade dress issues. Mr. Gelin represents clients in complex litigation and transactional matters both in the United States and globally. He has significant experience helping clients in the fashion, footwear, luxury goods, beauty products, entertainment and toy industries to protect and enforce their IP rights globally. Mr. Gelin graduated with honors from Cornell Law School and as an undergraduate with honors from Duke University. Outside of his law practice, Mr. Gelin is the Board President of Creative Arts Workshops for Kids (www.caw4kids.org) a not-for-profit which provides free weekend, after school and summer job arts programming to nearly 2,000 underserved children and teens in Northern Manhattan each year.
G Roxanne Elings is a shareholder and co-chair of Greenberg Traurig’s trademark/brand management group. She has experience in a full array of brand management issues, including anti-counterfeiting, prevention of grey-market goods and securing and enforcing clients’ IP rights. Ms. Eligns has specialized in anti-counterfeiting for 20 years. She obtained the first-ever *ex parte* asset restraint order in an anti-counterfeiting action and was involved in the first efforts by the New York City Mayor’s Office to hold landlords liable for counterfeiting on the premises. She has spoken and written extensively in this area. Ms. Elings represents clients in many different industries, including the fashion, luxury goods, fragrance, consumer goods, footwear, interactive gaming and entertainment industries.
[FN1] 456 U.S. 844 (1982).
[FN2]Id. at 847.
[FN3]Id. at 854-55.
[FN4] Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 984 (9th Cir. 1999).
[FN5] Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996); Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143 (7th Cir. 1992).
[FN6] Cartier Int’l BV v. Ben -Menachem, No. 06 Civ. 3917, 2008 WL 64005 (S.D.N.Y. Jan. 3, 2008); Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648 (S.D.N.Y. 1994).
[FN7] Cartier Int’l B. V. v. Liu, No. 02 Civ. 7926(TPG), 2003 WL 1900852 (S.D.N.Y. Apr. 17, 2003).
[FN8]Id.[FN9] 576 F. Supp. 2d 463 (S.D.N.Y. 2008).
[FN10]Id. at 494.
[FN11]Id. at 494-95.
[FN12] Id.[FN13]Id. at 506-507.
[FN14] Id. at 507-10.
[FN15]Id.[FN16]Id. at 478-79.
[FN17]Id.[FN18] Tiffany (NJ) Inc. v. eBay, Inc., No. 08-3947-cv2010, U.S. App. LEXIS 6735 (2d Cir. Apr. 1, 2010).
[FN19]Id. at *37.
[FN20] Verdict, Agreement and Settlement, Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 2009 WL 3062893 (N.D.Cal. Aug. 28, 2009).
[FN21]Id. at 9, 13.
[FN22]Id. at 7.
[FN23]Id. at 12.
[FN24] Complaint, Gucci America, Inc. v. Frontline Processing Corp., No. 09-cv-6925 (S.D.N.Y. Aug. 5, 2009).
[FN25] Gucci Am., Inc. v. Laurette Co., Inc., 08 Civ. 5065 (L.A.K.) (S.D.N.Y. June 3, 2008).